Monday, March 31, 2008


The clamor is getting louder for the federal government to “fix” the sub-prime loan problem. Somehow an arm of the government is to order mortgage companies to extend the introductory rates. That such a solution is even discussed is an example of how poorly our populace is educated in economics.

A co-worker told me about a report on TV saying that minorities were sold a greater percentage of sub prime loans, proving that corporations are not only evil but racist. Sub prime loans were created in the first place because companies were coming under fire for not loaning to minorities. The lower introductory payments qualify more people and thus make the numbers look better.

The other result of these loan packages was that everyone could suddenly afford a bigger house up front. And since mortgage brokers and realtors make their commissions as a percentage of the contract price, the two most influential professionals in home sales were pushing their customers down that road. The up-front commission structure for salesmen created an incentive for big loans. The salesman isn’t responsible for the re-payment. No CEO said lets start making bad loans. It happened as a result of the reward structure.

The real culprit in the sub prime fiasco, the real villain is the Department of Education. We pay bureaucrats billions to create an education policy in this country and kids graduate high school without the vaguest idea of why sub-prime loans are risky. Why are we sending kids to school for 13 years on the dime of the tax payer and not teaching them about dimes?

The main reason is that schooling has become a form of social policy, trying to shape society through the minds of the young rather than teaching practicality. A secondary reason is that the education bureaucrats see the world in terms of the academic subjects that led them to Harvard and then to the cushy chair in Washington. Bureaucrats have the luxury of being bad with money because it is easier for them to make money. These kinds of people don’t understand the practical needs of Americans. They are occupied with trying to turn every youngster into a philosopher-king.

There are two chances in life for education, first formally when nothing is at stake but your own time and attention, and secondly in the school of life where decisions have real outcomes. For as much as people will be hurt by the sub prime reality, the lesson of pain will ensure that others wake up and pay attention to their own future economic decisions. It’s the only hope for a better future, because the Department of Education isn’t changing for anyone.


E said...

Like everywhere, we saw it happening around here -- the new houses got bigger and bigger and the first-time home buyers, who had never lived through a serious economic downturn, got younger and younger. Simple logic said the bubble would eventually burst and many a mortgage payment would be missed. Whatever happened to consequences? I was taught not to create a crisis unnecessarily, and not to prevent a rational crisis from happening. O that our government would heed that advice.

Serena said...

And it isn't just poor and/or minorities that bought into it. I know personally several well-educated people (one has a doctorate even) who got themselves in trouble with this. Finish up college with a whole bunch of loans and you want a fancy house to go with your new job title and self-importance and you are just ripe to be picked by the con because of your ego and lack of knowledge of economics. Add to that a huge car payment on a fancy car and massive credit card bills so you could afford all of the other status symbol crap that you need and it is a recipe for disaster.

Meanwhile they scoffed at me for driving my ten year old car and living in a house that is well below what I could afford even without an idiotic variable rate mortgage. Sadly, if the taxpayer has to bail them out, they will still not have learned anything and they will still have the last laugh.

Despite my basic loathing for the public school system, I have to give mine credit (back in 1980) when I had a class in 8th grade about balancing a checkbook, homebuying, buying a car...

Thanks for the thought-provoking post.

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